Dissolution of Partnership Firm

Closing a firm: modes of dissolution, the Realisation Account, assets taken over and creditors settled, realisation expenses, the result of realisation and final payments.

Key ideas

• A firm is dissolved by agreement, compulsorily (insolvency, the business becoming illegal), on a contingency (end of term or venture), by notice (partnership at will) or by the court.
• All assets except cash and bank are debited to the Realisation Account at book value, and outside liabilities and provisions on assets are credited to it.
• Assets sold: Bank Dr. To Realisation; an asset a partner takes over: that partner’s Capital Dr. To Realisation, at the agreed value.
• Liabilities are entered at the cash actually paid: a discount, or an asset given in part payment, reduces it.
• Realisation expenses paid by the firm are debited to Realisation; a partner’s agreed remuneration for the work is debited to Realisation and credited to that partner.
• The profit or loss on realisation and any reserve are shared in the profit-sharing ratio, and partners are paid the final balances of their capitals.

Remember

Watch out

• Transferring the cash or bank balance to the Realisation Account.
• Crediting an asset taken over by a partner to that partner’s capital.
• Entering creditors at their book value when they accept a discount.

Worked example